FHA ........ Major Condo Approval Change!!!

Well so much for my blog yesterday about not having seen any change to the Underwriting Guidelines lately. This morning my office made me aware of FHA's latest Mortgagee Letter 2009-19 that was issued on June 12th. In this latest Mortgagee Letter FHA is announcing MAJOR change to their Condo Approval Process.

"In accordance with the passage of the Housing and Economic Recovery Act (HERA) of 2008, the Federal Housing Administration (FHA) is implementing a new approval process for Condominium Projects to insure mortgages on individual units under Section 203(b) of the National Housing Act. FHA will now allow lenders to determine project eligibility, review project documentation, and certify to compliance of Section 203(b) of the NHA and 24 CFR 203 of HUD’s regulations. HUD will continue to maintain a list of Approved Condominium Projects. The requirements of this Mortgagee Letter are effective for all case numbers assigned on or after October 1, 2009 except as noted."

This is a MAJOR change to the present Condo Approval Procedure, and while it reduces the documentation and requirements for Full Condo Approval, it will place a lot more work and responsibility on Lenders. The new approval process states "The lender will have two condominium project approval processing options. The applicable documentation requirements will be the same for each option:

HUD Review and Approval Process (HRAP).

Direct Endorsement Lender Review and Approval Process (DELRAP), outlined in this Mortgagee Letter. This option is only available to lenders who have unconditional Direct Endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects"

Once an unconditional Direct Endorsement Lender approves a Condo Complex it will be added to the FHA Approved Condo List, and other Lenders will not have to repeat the process. The new approval process will do away with the need to do an Environmental Study in most cases, and the "Right of First Refusal" will no longer be a reason for declining approval of a Condo Complex.

The other MAJOR, MAJOR change, and this will present a huge problem in my opinion, is that this new approval process will do away with the present "Spot Approval".

"The Spot Loan Approval process as defined in Mortgage Letter 1996-41 is eliminated with issuance of this guidance. The DELRAP and HRAP processes have been streamlined to allow for uncomplicated condominium project approvals eliminating the need to approve units on a “spot loan” basis"

So now it will become an all or nothing, and a simple two page questionnaire will be replaced by a stack of paper work that is over an inch thick (I saw one the the application packets today). This new approval process will also add significant time to the approving a Condo Complex, as oppose to the quick "Spot Approval" that is now available. Granted that the new approval process once done will not have to be done again, as oppose to the "Spot Approval" which had to be done ever time a loan was done on a Condo in a Condo Complex which was not on the FHA Approved Condo List, but the amount of time and work far out weighs the benefit in my opinion.

Hopefully FHA will re-consider the removal of the now "Spot Approval" option before October 1st and let it continue.

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

George ... Thanks for this article and update on HUD and loan approval system for condos. I agree that FHA and HUD should re-consider their removal of the now "Spot Approval" option and let that continue.

Neal they are hurting themselves and their Condo Owners if they do not take steps to get approved. You are right about conventional condo loans, they are real tough right now.

Barbara, I will be getting more clarification on this, but to the best of my understanding Spot Approvals will available for all FHA Case Number until October 1st, and I believe that they are allowing Approved DE Lenders to begin approving condo's right now. I know that we have started to implement the process.

Stuart, I am afraid that it will be the opposite. Full Condo Approvals are time consuming, unlike the Spot Approvals which could be done very quickly.

Thanks George, I have already seen the stalled approvals as the banks try to sort out what they can and can't (or will or wouldn't to be more accurate) with condo loans. I will try to stay up to speed with the new developments. And have subscribed to your blog for that purpose. Thanks again Steve

Thanks for the update, your way ahead on dishing out the newest info. Hmmm, where's my lender? Anyway I am not sure about the right of first refusal. There are alot of complexes that still do it in my area with an assinine interview of the buyer and it just 'smells' of discrimination to me. Why do you have to go to this interview - so they can 'see' you. And why would that be?

I haven't had to do any spot approvals but there are alot of assn's that are letting their FHA approval lapse and that's just plain stupid to me! Let's try and save some $$$ but let's watch our home's value plummet like a rock to save $2.

Dan it is kind of like a double edge sword, they are loosening up the Full Approval, but doing away with the Spot Approval. One is an improvement but the other puts Buyers and Sellers at a major disadvantage.

Steve, conventional condo loans are not easy these day, and now with this change they are make FHA harder also. I will try to post any updates that I get.

Lyn I guess the interview process is common in a lot of states, but not here in Connecticut. The Right of First Refusal, basically gives the Condo Association the right to purchase the condo first. You would think that would be a good think, FHA has viewed this as a restriction on the Seller to sell. As of October 1st that will no longer be and issue.

George...thanks for this posting...and this is one of the great things about Active Rain! It's truly educational!

I sell mostly condos, and did not know about this till I read YOUR blog! I forwarded the link to several lenders I'm either in the middle of a transaction with, or work with. I was amazed that they some new nothing about it, others did but didn't really think about it, and the "good" ones said, "Oh yeah, things are really gonna be fun after October 1."

I have a Seller who works for a mortgage company, and they are SOOOOO glad their condo is under contract now, as it will require an FHA spot approval!

Thom, we are hoping that with enough input from Lenders that FHA will re-consider their decision to do away with the Spot Approval. It would be a real shame to make the Full Approval a little easier but make the sale of Condo's harder by doing away with the Spot Approval.

George, I am still looking for information as to the criteria that an Underwriter is suppose to use when evaluating the Reserves of the Condo. Any guidance would be appreciated.

As you have said, I see this as a double edged sword. I suspect that the primary reason for this change is to make sure that HUD only insures the financing of Condo's that have sufficiently funded reserve accounts. HUD does not want new buyers to be hit with a Large Special Assessment that might cause distress. Possibly this is one reason FNMA and others have tightened up on Condo Financing. I wonder if information about Reserves is something that needs to be disclosed to potential buyers and if the Agencies will call for that in the future.

Timely info - I think the bottom line is that if you have a listing in a condo building that is not approved for FHA or VA financing, then you have almost no chance of selling the unit. Conventional lenders want 20% to 25% down to purchase a condo now and you can't get MI over 80%. So if you have a $150,000 listing in a non-approved condo complex then the buyer will need a minimum of $30,000 down payment - good luck. My consulting firm works with builders and condo boards all over the country to get projects approved with HUD for FHA and VA financing. It is also worth noting that projects that have not filled out the 2 year renewal on time will be kicked off the approved list. Estimates say that 60% of the current approved condos will be suspended for lack of renewal paperwork.

I own a consulting firm that can help you obtain project approvals for your condominiums. FHA is the best way to get financing for your condominiums even with the rule changes effective October 1st. I have over 15 years national experience in condominium project approvals and have submitted hundreds of projects through FHA, Fannie Mae, and Freddie Mac. I would love to hear from you if you need assistance.

I have heard that some reverse mortgages lenders are nervous. It seems that some brokers had obtained spot approvals from condo associations saying that the condo assoc. had reserves when in fact they didn't. Proof of having reserves (roof replacement etc.) were needed for the spot approvals. Now, lenders are afraid that FHA will not pay off their reverse mortgage that they are holding for an amount that is less then they can sell the property at foreclosure and that FHA will not pay the lender off if they feel there was fraud in the spot approval. One lender supposedly said that they would sue the people or association who provided the spot affidavit stating that there were reserves when in fact there were not. Anyone heard anyting on this?

As I mentioned in an earlier post on September 3. I have a consulting company, Condo Approval Professionals LLC, that can help those that need their condos approved through FHA as well as the other agencies. I have over 15 years of national project approval experience. Visit us on the web at www.condo-approval.com to find out more about my company and the services we provide. I can be reached at steve@condo-approval.com or by phone at (847)293-2962

I've made several attempts to buy a condo, and my realtor doesn't seem to know the pitfalls, until I went on line reading about all of the legal rammifications connected with this. It hit me like a brick, just two days before escrow would close. I've lost my condo, the tax rebate, and like many others, we have been royally screwed... I'm an American Citizen, native of California, and just need a place to live. I'm tired of living out of a bedroom for almost 3 years now. I completed a 2 1/2 year divorce. I bought furniture, appliances, that some things I could not return, and they are in limbo, waiting for a delivery address, that I don't have. How much longer, must I wait?????

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